Lapses & Leniency

When Otto Hermann Kahn testified last month before the Senate Finance Committee on international banking and War Debts, he was asked for a list of defaulted foreign bonds held in the U. S. Obliging Banker Kahn got a list from the Institute of International Finance. Made public last week by the Senate Committee, the list was gloomy reading, showed $815,000,000 worth of dollar bonds in default. There were 57 issues listed, every one the obligation of some South American government, state or municipality. Bolivia, Brazil, Chile. Peru have defaulted on their government bonds. In Colombia and Uruguay payments on municipal issues have been allowed to lapse. Included on the list were defaults of either interest or sinking fund payments. Approximate totals: Brazil, $318,000,000; Chile, $268,000,000; Peru, $91,000,000; Bolivia, $61,000,000; Colombia, $11,000,000; Uruguay, $5,684,000.

Another thing which the Senate Committee turned up in the course of its investigation was that a vast majority of these defaulted bonds and other foreign issues were held by the public ("Tom. Dick & Harry"), not by banks. Nevertheless last week many a national banker dreaded the call for his bank's statement of condition issued by Comptroller of the Currency John William Pole. With secondary reserves largely invested in high-grade bonds, which have declined to record lows, most banks faced big paper losses if they did not sell, big actual losses if they did. In August the Government recognized the banks' plight, eased the rules on bond depreciation. Last week Comptroller Pole offered national banks still greater leniency, thus setting the pace for various State bank superintendents. In their December statements national banks did not have to charge off any depreciation on bonds of the U. S., States, municipalities. Examiners were ready to appraise at their face value all bonds in the four highest categories of famed rating services.* On all other bonds except those in default examiners were given wide latitude to use their own discretion, appraising securities at what they thought were their "intrinsic value."

In New York City last week Clearing House bankers met, agreed that they, too. would all abide by the easier regulations. Stronger banks might have waived leniency, flaunted their good position in the face of weaker ones which sorely needed easy rules of appraisal for their year-end statements. But once again New York banking kept its solid front.

Meanwhile at Washington further official facts on costly bank investments were revealed. A report was made by the sub-committee of the Senate Committee on Banking & Currency which began a dignified investigation of the U. S. banking system in February (TIME, Feb. 16). Chairman of the inquiry was Virginia's Senator Glass, legislative sire of the Federal Reserve and arch foe of stock speculation. Each Reserve district was asked: "On which type of investment do you find banks have suffered the largest losses?" Among the answers were:

Boston--traction securities; second grade industrial and foreign bonds.

New York--practically every type of bond.

Philadelphia--stocks, real estate loans.

Cleveland--foreign issues, Southern municipals, leasehold bonds.

Richmond--foreign securities, secondary bonds, real estate.

Atlanta--Second grade public utility and industrial corporation bonds.

Chicago--real estate loans, foreign bonds.

St. Louis--drainage district, and levee bonds.

Minneapolis--foreign bonds.

San Francisco--unlisted securities, irrigation bonds.

Kansas City alone struck a new note: "Losses too nominal to warrant a comparison."

Focus of the Senators' interest was the Bull Market and the 1929 Crash, with particular reference to parts played therein by banks and the Reserve. Most of the Committee's findings were ancient history to the investor who had lost his shirt. But bankers throughout the land perused the report carefully because they knew it would serve as a working text for bank legislation yet to be framed by the Committee. Buried under piles of financial statistics were these general conclusions:

1) The more commercial banks participate in the capital and security markets, the more exaggerated become the fluctuations of business and finance.

2) Loans in the call money market made by banks with cash supplied by such nonbanking interests as corporations, investment trusts and wealthy individuals (technically called accounts "for others") play a "mischievous role" in unruly credit expansion.*

3) In 1929 the restrictive rate policy of the Federal Reserve (then under Governor Roy Archibald Young) did help to hold down the banks' own security loans but "no special steps" were taken by Federal Reserve officials to control out-side cash flowing through the banks to the speculative market.

4) Since the Crash, the operation and results of banks' security affiliates have been "on the whole unfavorable."

5) Commercial banks have not the watchful control over security loans they have over commercial loans.

6) Country banks go in heavily for bond investments whereas city banks tend to put more & more of their cash into stock loans.

*Four highest ratings by Moody's Investors Service: Aaa. Aa, A, Baa; Fitch Bond Record: A A A. AA. A. BBB.

*Last November the New York Clearing House Association outlawed "loans for others" among its member banks (TIME, Nov. 30).

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